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Flashcards in NINJA 3 AUD Deck (20):
1

Which of the following is not an example of an accounting estimate that might be included in financial statements?

A.
Allowance for loan losses

B.
Accounts receivable

C.
Annual effective tax rate in interim reporting

D.
Percent of completion under contract accounting

The correct answer is B.

Examples of accounting estimates are allowances for loan losses, annual effective tax rate in interim reporting, and the percent of completion under contracts. Accounts receivable in itself is not an accounting estimate. The collectibility and thus any allowance is an estimate.

2

The auditor determines that there is a low assessed risk of material misstatement concerning litigation, claims, and assessments. As a result, the auditor elects not to send a letter of inquiry to lawyers under which set of standards?

I.U.S. PCAOB Auditing Standards
II.U.S. Auditing Standards under the AICPA
III.International Standards on Auditing (ISAs)

A.
I only

B.
III only

C.
Both I and II

D.
All of the answer choices are correct.

You are correct, the answer is B.

International standards only require an attorney's letter when an auditor assesses a risk of material misstatement. U.S. auditing standards have a presumptive requirement to send a letter of audit inquiry to lawyers.

3

Under which of the following circumstances would using the blank form of confirmation of accounts receivable most likely be preferable to other types of positive confirmations?

A.
The auditor's combined assessed level of control risk and inherent risk is low.

B.
Prior years' audits indicate a pattern of overstatement of account balances.

C.
Recipients are likely to sign other types of positive confirmations without careful investigation.

D.
Accounts receivable are immaterial to the entity's financial statements.

. The correct answer is C.

The blank form of confirmation asks the recipient to fill in the balance or furnish other information. Blank confirmations also provide a greater degree of assurance, but there is a higher probability that the confirmation will not be returned because of the additional effort required on the part of the participant.

A positive confirmation requires a response from the participant by requesting that the recipient indicate agreement with an amount. One of the risks with a positive confirmation is that amounts are printed for the recipient to confirm and that the recipient will merely sign without verifying the information is correct.

Thus, when recipients are likely to sign other types of positive confirmations without careful investigation, the auditor would want to use the blank form of confirmation.

4

An auditor determines that materiality for an audit is to be $X. The auditor determines that some misstatements will exist in his or her audit findings. As a result, the auditor calculates a new amount of 50% of X so that individual or in the aggregate misstatements do not quantitatively exceed the materiality level. This reduced calculation is known as:

A.
tolerable rate.

B.
sampling risk.

C.
maximum tolerable rate.

D.
performance materiality.

The correct answer is D.

AU-C 320.09 defines performance materiality as “the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.”

Sampling risk arises from the possibility that when a compliance or substantive test is restricted to a sample of balances or transactions that may be different from the conclusions reached if the test were applied in the same way to all items in the account balance or class of transactions. The maximum tolerable rate represents a critical value established so that the possibility of deviations in excess of that rate would cause the auditor to place less than full reliance on the control being evaluated.

5

An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all:

A.
noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period.

B.
expenditures for property and equipment have been recorded in the proper period.

C.
noncapitalizable expenditures for repairs and maintenance have been properly charged to expense.

D.
expenditures for property and equipment have not been charged to expense.

The correct answer is D.

The trick to this question is the population that is being examined. Property and equipment expenditures for asset acquisition or enhancement or for extension of the life of an asset should be capitalized, not expensed, to value assets and expenses properly. By analyzing amounts recorded as repairs and maintenance (the population specified in the question), the auditor verifies that expenditures for property and equipment have not been incorrectly charged to expense.

The other primary audit concern regarding property and equipment—that noncapitalizable expenditures for repairs and maintenance have been properly charged to expense—is verified by examining a different population. Specifically, the auditor should examine the property and equipment accounts to ensure that expenses were not capitalized.

The auditor would also review both noncapitalizable expenses and the expenditures for property and equipment recorded in the asset accounts to verify all amounts are recorded in the proper period, but this is not a primary audit concern.

6

While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate?

A.
Move detailed analytical procedures from year-end to interim

B.
Increase the dollar threshold of vouching customer invoices

C.
Send negative accounts receivable confirmations instead of positive accounts receivable confirmations

D.
Use more experienced audit team members to perform year-end testing

The correct answer is D.

Numerous unexpected errors found while performing interim audit procedures of accounts receivable would cause the auditor to consider whether a client's financial statements contain a greater risk of material misstatements.

AU-C 330.A1 states:



Quote


Overall responses to address the assessed risks of material misstatement at the financial statement level may include:

emphasizing to the audit team the need to maintain professional skepticism.
assigning more experienced staff or those with specialized skills or using specialists.
providing more supervision.
incorporating additional elements of unpredictability in the selection of further audit procedures to be performed.
making general changes to the nature, timing, or extent of audit procedures (for example, performing substantive procedures at period-end instead of at an interim date or modifying the nature of audit procedures to obtain more persuasive audit evidence).



Moving detailed analytical procedures from year-end to interim is the opposite of the timing of audit procedures recommended in AU-C 330.

Increasing the dollar threshold of vouching customer invoices would decrease the number of invoices selected in a sample and would result in less persuasive audit evidence.

Sending negative accounts receivable confirmations instead of positive accounts receivable confirmations would result in less persuasive audit evidence.

7

Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?

A.
Reconcile receiving reports with related cash payments made just prior to the year-end

B.
Review the responses of accounts receivable confirmations for indications of disputes with customers

C.
Compare cash payments made after the balance sheet date with the accounts payable trial balance

D.
Examine a sample of creditor balances to supporting invoices, receiving reports, and purchase orders

The correct answer is C.

Of the responses provided, comparing cash payments made after the balance sheet date with the accounts payable trial balance would most likely be performed by an auditor searching for unrecorded liabilities.

This procedure would assure the auditor that the cash disbursements were not for liabilities that should have been recorded in the prior year.

8

A lawyer's response to an auditor's inquiry concerning litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the client's financial statements. Which parties should reach an understanding on the limits of materiality for this purpose?

A.
The board and the client's management

B.
The client's audit committee and the lawyer

C.
The client's management and the lawyer

D.
The lawyer and the auditor

The correct answer is D.

Legal counsel's response may be limited to matters that are considered individually or collectively material to the financial statements, provided the entity and auditor have reached an understanding on the meaning and limits of materiality for purposes of this letter and management has communicated such understanding to the legal counsel.

AU-C 501.A56

9

Which of the following procedures would an auditor most likely perform prior to the balance sheet date?

A.
Review subsequent events

B.
Perform search for unrecorded liabilities

C.
Send inquiry letter to client's legal counsel

D.
Review detail and test significant travel and entertainment expenses

The correct answer is D.

An auditor may perform substantive procedures at an interim date, and she is more likely to do so for certain account balances and classes of transactions over others. The auditor would favor interim testing if:

the assessed risk of material misstatement is low,
the controls are strong,
the auditor can reduce the risk that misstatements that exist at the period-end are not detected by performing appropriate procedures, and
GAAS does not require testing at the balance sheet.
Travel and entertainment expenses are the only classes of transactions for which interim testing would increase the efficiency of the audit.

Subsequent events are those events that occur after the balance sheet date but before the date of the report, and they cannot be tested at an interim date. The search for unrecorded liabilities also must be performed as of the balance sheet date. The response from the attorney must cover the entire year under audit and would not be useful to the auditor if it were dated prior to the balance sheet date.

10

An audit of internal controls is required under which of the following standards for publicly traded entities?

I. U.S. PCAOB Auditing Standards
II. International Standards on Auditing (ISAs)

A.
I only

B.
II only

C.
Both I and II

D.
Neither I nor II

You are correct, the answer is A.

International auditing standards issued by the International Auditing and Assurance Standards Board do not require an audit of internal control, while U.S. PCAOB standards do require such an audit.

11

In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence concerning management's assertions of:

I. presentation and disclosure.
II. existence or occurrence.

A.
Both I and II

B.
I only

C.
II only

D.
Neither I nor II

The correct answer is C.

Assertions are claims in the financial statements made by management. The existence assertion for an asset such as property, plant, and equipment involves determining whether the asset actually exists on a given date. By personally inspecting additions to property, plant, and equipment, the auditor satisfies the existence assertion. The “presentation and disclosure” assertion involves judging whether an asset is properly classified in the financial statements. Visually inspecting an asset does not sufficiently determine whether the financial statements are properly prepared.

Existence is a management assertion that assets and liabilities are real and exist at a specific date (AU-C 315.A114).



Example


An example of existence would be that all inventory reported in the balance sheet actually existed as of the balance sheet date.

An example of an audit procedure to test inventory existence would be to observe the inventory being counted on the balance sheet date.


12

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be:

A.
vendors with whom the entity has previously done business.

B.
amounts recorded in the accounts payable subsidiary ledger.

C.
payees of checks drawn in the month after the year-end.

D.
invoices filed in the entity's open invoice file.

The correct answer is A.

The key to this type of question is to ask: Which set of items will indicate whether every amount that should be recorded has been? Is the selected item, which should be recorded, actually recorded? Should this selected item, which is not recorded, actually be recorded?

In this case, the questions concern the completeness assertion, which states that all amounts are included and none is omitted. With respect to the completeness of accounts payable, you should ask: Which population will indicate where all accounts payable are recorded? Does the auditee owe some amount to anyone else?

Thus, the auditor must select from a population containing items that are not included but which possibly should be. For accounts payable, confirmation with vendors with whom the entity has previously done business, but to whom no recorded payable balance is due, is the appropriate population (“If the auditee asks this vendor if any amount is owed, will the answer be zero?”) Responses from a vendor to whom the client does owe a payable would reveal an unrecorded (i.e., incomplete) liability.

Keep in mind that the question asks about populations appropriate for confirmation for completeness. The other three populations listed are appropriate for other procedures; mere comparison of amounts recorded in the accounts payable subsidiary ledger to payees of checks drawn in the month after the year-end or to invoices filed in the entity's open invoice file may reveal an unrecorded liability. However, confirmation of a recorded amount is unlikely to provide any additional evidence about completeness.

13

Based on the assessed risk of material misstatement at the relevant assertion level, the auditor should consider which of the following matters in designing further audit procedures?

A.
Results of analytical procedures

B.
Sampling results

C.
Tolerable misstatement

D.
The characteristics of the class of transactions, account balance, or disclosure involved

The correct answer is D.

The auditor is required to design and perform further audit procedures that are responsive to the assessed risks of material misstatement at the relevant assertion level. In designing further audit procedures, the auditor should consider such matters as:

the significance of the risk,
the likelihood that a material misstatement will occur,
the characteristics of the relevant class of transactions, account balance, or disclosure involved,
the nature of the specific controls used by the entity and whether they are manual or automated, and
whether the auditor expects to obtain audit evidence to determine if the entity's controls are effective in preventing and detecting material misstatements.

14

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is:

A.
supported by a vendor's invoice.

B.
stamped “paid” by the check signer.

C.
prenumbered and accounted for.

D.
approved for authorized purchases.

The correct answer is B.

To verify that a voucher is submitted and paid only once, a system must be in place that cancels the voucher. Canceling prevents a voucher from being accepted as valid for payment again. Stamping a voucher paid is a form of canceling. If a sample of paid vouchers is examined to verify each are stamped “paid” and stamped only once, this provides assurance that each voucher is submitted and paid only once.

15

Which of the following is not a major reason for maintaining an audit trail for a computer system?

A.
Deterrent to fraud

B.
Monitoring purposes

C.
Analytical purposes

D.
Query answering

The correct answer is C.

An audit trail in a computer system, as in a manual system, assists in discovering fraud and therefore acts as a deterrent to perpetration of such acts.

Other major reasons for an audit trail include:

monitoring the system and the data produced, and
answering queries by tracking a specific transaction through the accounting records or tracing a transaction back to the original source and observing how it is processed through the system.
Analytical purposes are not a major factor for maintaining an audit trail in a computer system. Analytical review can be performed by retrieving recorded data stored in the computer system or on hard copy.

16

A U.S. entity prepares its financial statements in conformity with accounting principles generally accepted in another country. These financial statements will be included in the consolidated financial statements of its non-U.S. parent. Before reporting on the financial statements of the U.S. entity, the auditor practicing in the United States should:

A.
notify management of the U.S. entity that the auditor is required to disclaim an opinion on the financial statements.

B.
receive a waiver to report on the U.S. entity from the appropriate accountancy authority in the other country.

C.
obtain written representations from management of the U.S. entity regarding the purpose and uses of the financial statements.

D.
communicate with the auditor of the non-U.S. parent regarding the level of assurance to be provided.

The correct answer is C.

The auditor must know if the financial statements will have general distribution in the other country, as this information will have implications both for the manner in which the financial statements are audited and for the report wording and format. The auditor should obtain written representations from management regarding the purpose and uses of the financial statements.

A disclaimer of opinion is not required under these circumstances. The auditor can still gather evidence to support an opinion on the financial statements, even if they have been prepared in conformity with accounting principles generally accepted in another country. No waiver is required to report on the U.S. entity, and the U.S. auditor does not need to communicate with the auditor for the non-U.S. parent company.

17

To support financial statement assertions, an auditor develops specific audit objectives. The auditor then designs substantive tests to satisfy or accomplish each objective. Which of the following audit procedures would primarily respond to the audit objective for accounts receivable that accounts receivable are properly described and presented in the financial statements?

A.
Analyze the relationship of accounts receivable and sales and compare it with relationships for preceding periods.

B.
Review the aged trial balance for significant past due accounts.

C.
Review loan agreements for indications of whether accounts receivable have been factored or pledged.

D.
Review the accounts receivable trial balance for amounts due from officers and employees.

The correct answer is D.

The audit procedure, “Review the accounts receivable trial balance for amounts due from officers and employees,” is used to satisfy the audit objective that accounts receivable are properly described and presented in the financial statements (which supports the assertion about presentation) because it provides evidence about transactions with related parties, which must be separately disclosed.

18

“There are no violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency.”

The foregoing passage is most likely from:

A.
a client engagement letter.

B.
a report on compliance with laws and regulations.

C.
a management representation letter.

D.
an attestation report on an internal control.

The correct answer is C.

This statement should appear in the client's management representation letter to the auditor. Keep in mind the difference between management representations and auditor attestations (opinions or reports). It is the responsibility of management to give the assurance that there are no undisclosed violations (i.e., noncompliance with laws and regulations). The audit is not designed to guarantee that all violations will be found; the auditor's knowledge is limited to that acquired through the audit. Thus, the auditor and the user must rely on management representations.

The client engagement letter is the contract between the auditor and client outlining the scope and other details of the engagement. No representations of the sort quoted in the question are made in the engagement letter.

Even a report on compliance with laws and regulations does not state such representations. An auditor can only give negative assurance on compliance with laws and regulations under government auditing standards: “nothing came to our attention to cause us to believe…”

In an attestation report on an internal control, the auditor attests that “the entity maintained effective internal control over financial reporting” or that “management's assertion (about the effectiveness of the entity's internal control) is fairly stated…”

19

In evaluating an entity's accounting estimates, one of the auditor's objectives is to determine whether the estimates are:

A.
prepared in a satisfactory control environment.

B.
consistent with industry guidelines.

C.
based on verifiable objective assumptions.

D.
reasonable in the circumstances.

The correct answer is D.

An accounting estimate is an approximation made by management of a financial statement element, item, or account. Accounting estimates involve both subjective (judgment) and objective (known facts) elements. Financial statements would contain estimates for items such as warranty expense and allowance for doubtful accounts. The auditor must determine if the estimates made by management are reasonable.

The auditor must first obtain an understanding of how management developed the estimate. Based on that understanding, the auditor would then utilize one or more of these procedures to evaluate the reasonableness of the estimate:

Review and test the process used by management
Develop an independent estimate to compare to management's estimate
Review subsequent events or transactions prior to completion of fieldwork that may have an effect on the estimates

20

When an auditor tests the internal controls of a computerized accounting system, which of the following is true of the test data approach?

A.
Test data is coded to a dummy subsidiary so they can be extracted from the system under actual operating conditions.

B.
Test data programs need not be tailor-made by the auditor for each client's computer applications.

C.
Test data programs usually consist of all possible valid and invalid conditions regarding compliance with internal controls.

D.
Test data is processed with the client's computer and the results are compared with the auditor's predetermined results.

The correct answer is D.

The test data approach (sometimes called the test deck approach) is a way to audit “through the computer.” Test data is introduced into the client's computer system using the same program to operate the application being tested. The output is compared to the auditor's predetermined results. The test data approach does not involve a separate program.

An integrated test facility introduces a fictitious entity (such as a dummy subsidiary) with real entries in the master files of the client's computer system. The auditor then compares the processing of data through the fictitious entity with what should be there in order to test that the data processing is reliable. Like the test data (or test deck) approach, an integrated test facility uses the client's system.